Tax Reform in the 115th Congress

11/10/2017

House Ways and Means Advances Tax Bill & Senate Tax Reform Plan Unveiled

On Thursday afternoon, Nov. 9th, the chair of the House Ways and Means Committee, Representative Kevin Brady (R-Texas), made several changes to its bill. The 29-page amendment includes a 9 percent tax rate to small businesses, a tax break for adopting children, a new limit on an excise tax on private university endowments, a three-year holding period for investment firms to benefit from carried interest, and new restrictions on the Earned Income Tax Credit to name a few. Also of note, the amendment does not include a proposal to repeal the Affordable Care Act’s individual mandate that requires individuals to have health insurance or pay a penalty. The House Ways and Means Committee advanced the revised tax bill, H.R. 1 (115), by a 24-16 vote and will send the proposal to the full House for consideration next week. 

Late into Nov. 9th, the Senate Republican’s tax reform proposal was also released. Although the bill itself was not released, the Senate Finance Committee released a “Description of the Chairman’s Mark of the ‘Tax Cuts and Jobs Act,’” a detailed outline of the bill’s provisions. The plan has many similarities with the House counterpart. Both plans: 

  • Reduce the corporate income tax rate.
  • Increase the standard deduction.
  • Move to a territorial tax system.
  • Provide full expensing of certain capital expenditures.
  • Repeal the alternative minimum tax (AMT).
  • Provide more favorable tax treatment of pass-through businesses.
  • Attack state sovereignty by eliminating the state and local tax (SALT) deduction.

As the House begins deliberation among its entire body, the Senate Finance Committee also will be busy marking up its newly released bill. While the bills have similarities, there are some major differences. The most notable are: 

  1. Corporate Tax Rates
    • The House proposes cutting the corporate tax rate to a permanent 20 percent immediately, while the Senate would install the 20 percent rate in 2019.
  2. Individual Tax Rates
    • The House proposes reducing the number of individual tax brackets to four while the Senate would keep the current seven brackets, but lower some of the rates.
  3. State and Local Taxes
    • The House proposed a what it views as a compromise that would allow taxpayers to deduct up to $10,000 in state and local property taxes, while no longer allowing taxpayers to deduct state and local income taxes. The Senate proposes a full elimination of SALT.

  4. Mortgage Interest Deduction
    • The House plan proposes allowing taxpayers to deduct interest payments of new homes up to $500,000. The Senate would preserve the mortgage interest deduction. 
  5. Estate Tax
    • The House plan proposes to double the current exemptions and repeal it completely in 2025. The Senate proposes to double the current exemptions and only continue to index the exemptions to inflation. 
  6. Pass-through businesses
    • The House proposal includes a special 25 percent rate for pass-through income and a smaller rate for small businesses. The Senate would create a new deduction for pass-through income that would set a top rate for those businesses in the low 30s. 
  7. Deductions for student loan interest and medical expenses.
    • The House bill would eliminate the deductions, while the Senate would preserve them.
  8. Child tax credit
    • The House proposes expanding the credit from $1,000 to $1,600 per child and includes a $300 credit for the taxpayer, while the Senate proposes expanding the credit to $1,650. 

While there are some major differences between the two bills, one commonality is the attack on the state and local tax deduction. The state and local tax deduction, which has existed in the federal tax code since its inception, was created to protect state revenue sources from federal encroachment, as well as avoiding double taxation. The elimination of this crucial deduction would have significant impacts on state and local governments. NCSL released the following statement in response to both plans: 

Statement of NCSL President and South Dakota state Senator Deb Peters (R) on the House and Senate Tax Plans, “Both the House and Senate tax reform plans are an attack on the sovereignty of the states. We are opposed to the elimination of the state and local tax deduction (SALT). SALT is one of the six original federal tax deductions and has been a staple of the federal tax code and the state-federal fiscal relationship for over 100 years. We will continue to fight for the more than 43 million Americans who claim this deduction every year."

The pressure continues to mount for Republicans to get something passed by the end of the year. The Senate Finance Committee will begin markup of itsr legislation on Monday at 3 p.m. ET and the House plans to vote on its piece sometime next week. 

See the amendment to the House Ways and Means tax bill H.R. 1 (115).

See the Senate Finance Committee chairman's mark of its legislation.

 



The Tax Cuts and Jobs Act (H.R. 1)

On Nov. 2, the “Tax Cuts and Jobs Act,” the long-anticipated plan for a sweeping overhaul of the federal tax code, was released by House Ways & Means Chairman Kevin Brady (R-Texas), after weeks of internal debate among Republicans. The plan is far from final and will likely change as the plethora of business groups, special interests, Democrats, state and local governments, and taxpayers begin analyzing the text as to see how they fare. The bill would add $1.5 trillion to the debt over 10 years, but Republicans believe the changes would trigger a surge in economic growth, higher wages, and job creation.

Below is a brief outline of the major details in the legislation.

Key details of the plan:

Proposed changes to the personal income tax:

  • Reduces the number of tax brackets from seven to four.           
    • 12 percent on the first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly.
    • 25 percent starting at $45,001 for individual; $90,001 for married couples.
    • 35 percent starting at $200,000 for individuals; $260,000 for married couples.
    • Maintains 39.6 percent starting at $500,000 for individuals; $1 million for married couples.
  • Increases the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.
  • Cuts the mortgage interest deduction in half for new homes, capping the mortgage interest deduction for newly purchased homes at $500,000.
  • Establishes a new “Family Credit” which includes expanding the Child Tax Credit from $1,000 to $1,600 and provides a credit of $300 for each parent and non-child dependent.
  • Eliminates the state and local tax deduction almost entirely.
    • Allows taxpayers to deduct state and local property taxes up to $10,000.
  • Repeals the Alternative Minimum Tax.
  • Doubles the exemption of estate taxes and repeals it entirely after six years.

Proposed changes to the corporate income tax:

  • Lowers the corporate tax rate from 35 percent to 20 percent.
  • Creates a new 25 percent maximum tax rate on pass-through business income.
  • Creates pass-through anti-abuse rules to try to address industries like health, law, financial services, professional services, and the performing arts from taking advantage of pass-through rates.
  • Allows businesses full expensing of short-lived capital investment, like equipment and machinery, for five years. Also increases Section 179 (qualifying equipment and/or software purchased during the tax year) expensing from $500,000 to $5 million and increases the phaseout threshold from $2 million to $20 million.
  • Limits the deductibility of net interest expense to 30 percent of a business’ earnings before interest, taxes, depreciation and amortization for all businesses with gross receipts of $25 million or more with a five year carry forward basis.
  • Eliminates the corporate alternative minimum tax.
  • Moves to a territorial tax system, in which foreign-source dividends and profits of U.S. companies are not subject to U.S. tax upon repatriation.
  • Enacts deemed repatriation of current deferred foreign profits, at a rate of 12 percent for cash and cash-equivalent profits and 5 percent for reinvested foreign earnings.

Other items of note:

  • Eliminates private activity bonds, which allow tax-exempt municipal bonds to be issued on behalf of a government for a project built and paid for by a private developer.
  • Eliminates the sale of municipal bonds for professional sports stadiums and privately-run infrastructure projects.
  • Eliminates the itemized deduction for medical expenses.
  • Eliminates the $7,500 per vehicle tax credit for electric-cars.
  • Does NOT touch 401(k)s.
  • Removes a federal tax subsidy for state and local governments to offer incentives and concessions to businesses that locate operations within their jurisdiction.
  • Repeals the limitation on political statements by churches.
  • Eliminates interest deduction on qualified student loans.
  • Would treat employer-provided assistance with undergraduate and graduate college expenses (up to $5,250 a year) as taxable income.
  • Allows an unborn child in the womb to be designated a beneficiary or individual for a 529 account.
  • Allows families to use 529 accounts for up to $10,000 in expenses for elementary and secondary education.  529 accounts also expanded to include apprenticeship programs.
  • Eliminates the Work Opportunity Tax Credit. 

Next Steps

Senate Republicans are expected to release their tax reform plan next Wednesday and it will likely look much different from the House’s. Some of the tough choices the House made might not fly among Senate Republicans, who have a narrow margin for passage and can lose only two GOP votes. It is expected that the House Ways & Means Committee will begin the markup of the Tax Cuts and Jobs Act next Monday, Nov. 6.

The proposed plan would have significant impacts on state and local government. The most noticeable would be the elimination of the deduction for state and local income taxes and a partial deduction on property taxes. NCSL released the following statement in response to the House tax plan:

NCSL President and South Dakota state Senator Deb Peters (R) said, “This is an attack on the sovereignty of the states. We are opposed to the modification, which is essentially an elimination, of the state and local tax deduction (SALT).  SALT is one of the six original federal tax deductions and has been a staple of the federal tax code and the state-federal fiscal relationship for over 100 years. We will continue to fight for the more than 43 million Americans who claim this deduction every year.”

With the failed effort by Congress to repeal and replace the Affordable Care Act and the stalling of an infrastructure investment package the pressure is on for the Trump administration and the Republican leadership of Congress to enact a tax package by the end of the year. Many in Washington who believe that the chances of that happening appear to be very low.

 



A Unified Framework for Fixing Our Broken Tax Code

On Sept. 27, President Donald Trump and the “Big Six” — which includes Senate Majority Leader Mitch McConnell (R-Ky.), Speaker Paul Ryan (R-Wis.), Senate Finance Chairman Orrin Hatch (R-Utah), House Ways and Means Chairman Kevin Brady (R-Texas), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn — released their latest framework for overhauling the U.S. tax code. The nine-page document will serve as a starting point for tax writers in both the House and the Senate to hash out the rest of the details.

Guiding Principles for Tax Reform

The framework outlines four guiding principles for tax reform:

  • “Make the tax code simple, fair and easy to understand.”
  • “Give American workers a pay raise by allowing them to keep more of their hard-earned paychecks.”
  • “Make America the jobs magnet of the world by leveling the playing field for American businesses and workers.”
  • “Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.”
     

Goals for Tax Reform

The framework defines the goals for the Trump administration, the U.S. House Committee on Ways and Means, and the Senate Committee on Finance in crafting “pro-American, fiscally-responsible tax reform:

  • Tax relief for middle-class families.
  • The simplicity of “postcard” tax filing for the majority of Americans.
  • Tax relief for businesses, especially small businesses.
  • Ending incentives to ship jobs, capital and tax revenue overseas.
  • Broadening the tax base, and providing greater fairness for all Americans by closing special interest tax breaks and loopholes.

Tax Reform Structure

While the broad framework lacked many specifics, it outlined a general plan for restructuring the personal income tax and the business income tax.

Proposed changes to the personal income tax:

  • Roughly doubles the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers.
  • Condenses the seven personal income tax brackets into three brackets of 12 percent, 25 percent and 35 percent.
  • Repeals the personal exemptions for dependents, calls for an increase of the Child Tax Credit, and provides a new $500 nonrefundable credit for non-child dependents.
  • Repeals the Individual Alternative Minimum Tax (AMT).
  • Eliminates “most” itemized deductions, including the State and Local Tax Deduction, but retains the deductions for home mortgage interest and charitable contributions.
  • Repeals the estate tax and generation-skipping transfer tax.

Proposed changes for the taxation of businesses:

  • Pass-through tax rate: Limits the maximum tax rate applied to business income of small businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent.
  • Reduces the corporate income tax rate to 20 percent from 35 percent and eliminates the corporate alternative minimum tax rate.
  • Allows businesses to write off (or “expense”) the cost of new investments in depreciable assets, such as equipment or machinery, for at least five years.
  • Eliminates the current-law domestic manufacturing (“section 199”) deduction. Calls for the preservation of the research and development credit and the low-income housing tax credit.
  • Moves to a territorial tax system, in which foreign-source profits of U.S. companies are not generally subject to U.S. tax upon repatriation. Calls for a global minimum tax intended to protect the U.S. tax base from cross-border income shifting.
  • Enacts a one-time tax on previously accumulated foreign-source earnings. Calls for a lower tax rate on liquid foreign assets and a higher tax rate on illiquid foreign assets, although doesn’t specify either rate.

Next Steps

With the release of the initial tax reform framework, the next step will be in the hands of House and Senate tax writers to fill in the details. But first, Congress will need to pass a budget that includes tax reform instructions so that Congress can then use budget reconciliation for tax reform. Budget reconciliation is a legislative maneuver that allows the majority in the Senate to bypass the filibuster process, allowing them to pass legislation with 51 votes, instead of the normal 60. House Ways and Means Chairman, Kevin Brady, said he won’t release the legislative text of a tax reform plan until Republicans have a budget in place. Meanwhile, the administration and GOP leaders will also need to package this plan and sell it to the public as tax relief for the middle class and not a windfall for the wealthiest Americans if they want the reform to make it across the finish line.

In sum, today’s release of a tax reform framework is just the beginning of a lengthy legislative process to overhaul the nation’s tax code. While Republicans are desperate for a win and a legislative victory, enacting tax reform is by no means an easy feat and the process may continue well into 2018.

Additional Resources

  • Read the amendment to the House Ways and Means tax bill H.R. 1 (115) here.
  • Read the Senate Finance Committee chairman's mark of its legislation here.
  • Read the full text of The Tax Cuts and Jobs Act (H.R. 1) here.
  • Read the House Ways and Means section-by-section summary here.
  • Read full text of the administration’s “Unified Framework for Fixing Our Broken Tax Code ” here.
  • Read NCSL's Statement that Urges Preservation of the SALT Deduction, here.
  • Read NCSL's policy position on federal tax reform, here.